Preparing To Be Unprepared For The Minsky Moment

This post was written a week ago for www.hnworth.com, a site targeting high net worth individuals in Singapore.

Have fun reading…

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Help, my son wants to read Economics for his GCSE examinations much to my chagrin, arousing some of the Tiger Mom instinct in me. Tiger Mom says no difficult-to-score subjects please because the rest are hard enough to juggle, so why not pick PE ? Nobody fails in PE, even as a GCSE subject, let us get real here. Or why not Drama or Art ? Subjective subjects.

“But Mommy, I want to learn what Economics is all about. Isn’t that what you do ?”, the petulant whine came, and I was unsure if it was an intended jab at what he thought of my work.

My main gripe against Economics is that half of what you learn is impossible to apply in this crazy day and age of prima donna central banks and regulators, the latest being the Dodd-Frank/Glass-Steagal Act that will give the Federal Reserve even more powers. http://econ.st/1giUlkI

The Economist : “The new masters of the financial universe are neither bank bosses nor hedge-fund titans. They are the regulators whose job it is to make finance safer.

The basic assumptions in Economics 101 are :

  • People have rational preferences among outcomes that can be identified and associated with a value.
  • Individuals maximise utility (as consumers) and firms maximize profit (as producers).
  • People act independently on the basis of full and relevant information.

The basic problem is on how to use limited resources to satisfy our preferences and unlimited wants.

Well, we know that markets are 99% irrational and irrationally maximising utility = GREED, an unquantifiable variable and people DO NOT ACT INDEPENDENTLY and DO NOT HAVE ACCESS TO FULL AND RELEVANT INFORMATION.

Even the current stark reality that we are facing – secular stagnation, that we wrote about a fortnight ago, is not a textbook chapter because the economic purists cannot agree on it.

And it is snowballing into a Minsky moment as I write, yet another non-economic term.

A Minsky moment is a sudden major collapse of asset values which is part of the credit cycle or business cycle. Such moments occur because long periods of prosperity and increasing value of investments lead to increasing speculation using borrowed money. Source : Wikipedia https://en.wikipedia.org/wiki/Minsky_moment

Sudden = unexpected.

And yes, this morning we have a crisis as China devalued their currency a second day in a row and by the most in 2 decades.

To continue reading …….